Main conceptual topics for Acct 301b exam 3

pretax financial income>taxable income

Deferred tax liability (DTL) examples: credit sales, prepaid expenses (rent)

pretax financial income

deferred tax asset (DTA) examples: unearned revenues, accrued expenses

future taxable amounts

DTL

future deductible amounts

DTA

income tax payable

taxable income x enacted tax rate

taxable temporary differences (DTL)

sales accounted for on accrual basis and cash basis for tax purposes, contracts accounted for under the percentage of completion method, investments accounted for using equity method for financial reporting and cost method for tax purposes,gain on conversion of non-monetary assets, unrealized holding gains for financial reporting and deferred for tax purposes

deductible temporary differences DTA

product warranty liabilities, estimated liabilities to discontinued operations, litigation accruals, bad debt expense, stock based comp expense

Permanent Differences

Differences between tax and financial reporting of revenue (expenses) that will not be reversed at some future date. These result in a difference between the company's effective tax rate and statutory tax rate and do not result in a deferred tax item.

permanent differences examples

interest received on state and municipal obligations, expenses incurred in obtaining tax exempt income, proceeds from life insurance carried by the company on key officers or employees, premiums paid for life insurance carried by the company on employees, fines and expenses from violating law

Which of the following items leads to the creation of a deferred tax assets?

a. expected litigation losses are deducted for book purposes but not allowable for tax purposes

b. magazine subscription revenue collected in advance is included in taxable income but not financial income

c. net operating loss carried forward

D. ALL OF THE ABOVE

income tax payable is calculated as

a. Taxable income multiplied by the effective tax rate.

b. Financial income multiplied by the effective tax rate.

c. Financial income multiplied by the enacted tax rate.

D. Taxable income multiplied by the enacted tax rate

effective tax rate is calculated as

income tax expense/ pretax financial income

differences between pretax financial income and taxable income may create

a. a future taxable amount

b. a future deductible amount

c. a permanent difference

D. all of these

At the end of 2019, Delta corporation had a deferred tax asset of 20,000. What entry is required if it is more likely than not that the 9,000 deferred tax asset will not be realized

debit income tax expense 9,000 credit allowance for deferred tax asset 9,000

Lessor

the party who leases the object and or item for a specific period of time

lessee

the party that pays to use an item or object from the lessor

advantages of leasing

100% financing at fixed rates, protection against obsolescence, flexibility, less costly financing

advantages of leasing for the lessor

provides profitable interest margins, stimulate sales, tax benefits to various parties involved, high residual value

capitalization of leases

do not capitalize any leased assets, capitalize leases that are similar to installment purchases, capitalize all long term leases, capitalize leases where penalty for nonperformance is substantial

lessor lease type

sales type lease or finance lease or operating lease

lesee lease type

finance (must pass one test) or operating lease

Which of the following is NOT true about lease classification for the lessee?

a. Leases can be classified as either finance or operating leases.

b. The lessee needs to capitalize the related asset and liability regardless of classification of the lease.

c. A lessee should classify a lease based on whether the arrangement is effectively a purchase of the

underlying asset.

D. A lease involving an asset that has an alternative use should be classified as a finance lease.

The present value of lease payments

A. Includes the present value of guaranteed, but not unguaranteed, residual value.

b. Never includes the change in variable lease payments.

c. Should always be calculated using the lessee's incremental borrowing rate.

d. All of these are true.

Assume that on December 31st, 2021, end of the lease term, the balance of the lease receivable is $60,000 and the actual residual value of the equipment is $54,000. What entry, if any, would

OC Leasing (Lessor) have to record on that date?

Debit Inventory 54,000 Debit Loss on lease 6,000 Credit lease receivable 60,000